The Potential Side Effects of Halbig

The recent decision of a three-judge panel in the Halbig case, if it prevails, would have a direct effect on the availability of subsidies under the Affordable Care Act (ACA). People buying coverage on their own in insurance exchanges run by the federal government would be ineligible for income-based subsidies. Depending on how you count, that would take premium subsidies away from 4.6 million people in 34 states, or 4.7 million people in 36 states if you count New Mexico and Idaho (which have signaled their intention to operate their own exchanges but are still using the federal marketplace).

Many more people are eligible for subsidies but haven’t yet signed up. We estimate (using the approach described here that a total of 9.5 million uninsured people are eligible for subsidies in federal marketplace states (or, 9.7 million people if you include New Mexico and Idaho).

Since many low and moderate income people would have difficulty affording insurance without the subsidies, this would no doubt alter the extent to which the ACA is reducing the number of Americans who are uninsured, which recent surveys peg at about 8 to 10 million.

But, there would also be two important side effects of the Halbig case.

First, it would nullify the so-called “employer mandate” in states using the federal marketplace. There are two penalties under the employer requirement. The first – which equals $2,000 per employee – is assessed against employers that do not offer coverage at all. However, it only kicks in if at least one of the employer’s workers gets a subsidy in an exchange. If there are no subsidies, there can be no employer penalties. The other penalty applies when an employer offers coverage but that coverage is not affordable for some workers. Any worker who only has access to unaffordable employer-offered coverage is eligible for subsidies in an exchange, and if she gets a subsidy the employer owes a $3,000 penalty. Again, with no possibility of subsidies, there is no employer penalty. (It’s a little trickier with multi-state employers, who still might face penalties even if they operate in a state using the federal marketplace.)

Second, it would make the individual insurance market unstable and potentially unworkable in federal marketplace states. The ACA’s insurance market rules would still be in place, so people with pre-existing conditions would be guaranteed access to insurance and could not be charged higher premiums than healthy individuals of the same age. And, the “individual mandate” would still apply, theoretically providing an incentive for healthy people to buy insurance. However, without subsidies many if not most uninsured people could not afford coverage. And, the effect of the individual mandate would, in fact, be significantly muted because most of the uninsured end up being exempt from its penalties.

The ACA exempts someone from the individual mandate if the lowest-cost insurance available would cost in excess of 8% of income. With subsidies available, less than 3% of uninsured people eligible for subsidies in the 36 federal marketplace states would be exempt. However, if the Halbig case prevails and the subsidies are invalidated in federal marketplace states, we estimate that 8.1 million (or 83%) of those formerly subsidy-eligible uninsured people would end up being exempt from the individual mandate. With the subsidies unavailable and the individual mandate rendered partially ineffective, it might be difficult to attract healthy people into the individual market and premiums could rise significantly in these states. The result could be what is commonly called a “death spiral,” as healthy people exit the market and premiums rise even more. (See here for a description of our eligibility model.)

Even if the Halbig decision is upheld, states could choose to set up exchanges – potentially even using the federal government’s healthcare.gov enrollment and eligibility infrastructure – thus making subsidies available, stabilizing the individual insurance market, and triggering penalties under the employer mandate. However, governors and state legislators in these states would have to want this to happen, and there may be opposition to that on both political and policy grounds in some states, as with the Medicaid expansion. Still, a dozen of the 36 states relying on the federal marketplace this year chose to expand Medicaid, and they would likely be prime candidates to move forward with state exchanges if that were the only way to provide subsidies to their residents.